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Chapter 13: Q. 3 (page 296)

Explain how time lags in discretionary fiscal policy making could thwart the efforts of Congress and the president to stabilize real GDP in the face of an economic downturn. Is it possible that these time lags could actually cause the discretionary fiscal policy to destabilize real GDP?

Short Answer

Expert verified

As a result, policymakers may push real GDP higher than anticipated, causing real GDP to become less stable.

Step by step solution

01

Introduction 

The given is the discretionary fiscal policymaking in the face of an economic downturn

The objective is to determine is it possible for this policy to destabilize real GDP

02

Explanation 

The president's and Congress's efforts to stabilize real GDP in the midst of an economic crisis could be thwarted by time lags in discretionary fiscal decisions.

The reason for this is that precise time recognition and information collecting are required in order to implement fiscal policy. As a result, the delay in acquiring information may cause the congress and the president to delay taking fiscal action.

As you may be aware, policy acts take time to manifest their full economic impact. As a result, if these time lags are very long, the likelihood of a downturn showing its effects by the time fiscal action is enacted increases.

As a result, authorities may push real GDP higher than intended in order to destabilize real GDP.

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Most popular questions from this chapter

Use traditional Keynesian analysis to evaluate the effects of discretionary fiscal policies.

Describe how certain aspects of fiscal policy function as automatic stabilizers for the economy

Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (a) of Figure 13-1, the government determined that the amount by which the AD curve had to be shifted directly rightward from the point E1 was equal to \(1.0 trillion. If the government decided that a \)0.2 trillion increase in real government spending was required to generate this shift, what must be the value of the MPC?

Determine whether each of the following is an example of a situation in which a direct expenditure offset to fiscal policy occurs.

a. In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use.

b. The government increases its expenditures without raising taxes. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.

c. The government finances the construction of a classical music museum that otherwise would never have received private funding.

Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. What might account for this outcome?
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